Instead of looking at absolute breadth (advancers minus decliners) data, let’s smooth out that data with moving averages and take a look at the ‘bigger picture’ of recent breadth developments.

Hat tip to Andrew Horowitz of the Disciplined Investor for teaching me how to draw and interpret this chart - a version of a chart seen on his post “Indicators We are Watching.”

The main idea of this chart is that I’m showing symbol $NYAD which is the NYSE Advance-Decline Line (”Breadth”) but I have turned that off (invisible) because it is so choppy.

The blue and red indicator you are seeing on the main chart is the 20 period Exponential Moving Average of Breadth (or of the $NYAD hidden chart) which serves as a “smoothing” mechanism.  It’s shown on an “Area Chart” which is visually appealing.  It’s really just a moving average of Breadth.

Underneath the Area Chart, I’m showing the S&P 500, with particular information given to the three most recent swing highs in price up to the 1,100 level.

As you may already know - or can see in the chart above - these price highs are being met on deteriorating breadth (internal) conditions which generally serves as a non-confirmation of price.

This is just another way to look at that - in seeing the ’smoothed’ average of Breadth forming lower indicator highs each time the S&P 500 has crept its way to a fresh new 2009 high.

See my prior post:

“Will Current Repeating Cycle Predict Future for S&P 500” to see inside this cycle in the 60min frame.

I also mention this in my post “Triple Measured Moves Show Character of Market.”

Moving away from this ’smoothed’ breadth chart, let’s look at the current “Market Internals” chart of the S&P 500 in TradeStation:

Reference my prior post “Market Internals Failing to Confirm Market Rally” for a description of how to interpret this chart.

While the $ADD is holding roughly similar daily highs near 2,000 (meaning 2,000 more shares closed higher on the day than those that closed lower), the “Volume” differential ($VOLD) is showing a negative divergence into recent price highs.

I’m also showing prior times the “$VOLD” indicator diverged with price just before a short-term pullback.

So far, I’m interpreting today’s rally as being the same type of rally that occurred on September 28th and October 22nd, which were strong up-days that merely interrupted the down-swing in action.

Any move to new highs would invalidate that thought process and argue for a more sustained rally, particularly as short sellers’ stop losses are triggered (I call this “Popped Stops”).

As usual, let’s watch these developments very closely.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade